Credit crunch forces return to market discipline

The credit crunch has made investors more demanding of the debt they buy, according to rating agency Standard & Poor’s.

The credit crunch has helped discipline return to the market, according to the latest research published by rating agency Standard & Poor's.  

S&P’s report “European Leveraged Finance Market Wobble Leads To Repricing Of Credit Risk” calculated that since mid-June 2007 49 transactions, totaling €70 billion ($97 billion), have been affected because they were pulled, downsized, changed in structure or pricing, or put on hold. This contrasts to only 17 deals, worth €7 billion, that were launched and completed.

The research showed it was far easier to syndicate debt with a higher credit rating as 41 percent of the debt syndicated was rated B and 35 percent was rated the higher BB.  By contrast of the affected debt 59 percent was rated B and 16 percent was rated BB. There were no credits with a 'BB+' rating or estimate in the group of deals that was not successfully syndicated. About 24 percent of credits in both categories were not rated.

“Everyone was keen to buy whatever they could get there hands on a few months ago but credit risk has become a meaningful factor again,” said Taron Wade, co-author of the report. 

S&P argues that structures like covenant lite loans have fallen by the wayside and €1 billion transactions will once again be considered jumbo deals. This is because the balance of power has now shifted back to investors.

Another co-author Simon Redmond said: “From our point of view excess liquidity has led to a lack of focus on fundamentals. It would be more logical if the pricing of assets were to reflect the probability of an asset defaulting and the owners’ recovery prospects should that asset default.”

Sources in the European debt markets believe it is unlikely underwriting banks in Europe will attempt to syndicate larger tranches of leveraged buyout debt until the US syndication of the First Data debt takes place at some stage in the next few weeks.